CalPERS officials know they have a serious problem: The nation”s largest pension system holds too many risky investments to adequately withstand the next big economic downturn.

Yet the only proposal under consideration to shore up the system would take decades to properly rebalance CalPERS” portfolio. If the next major recession comes before then, the retirement system will have to sock state and local governments with devastating rate increases at a time when they can least afford it.

CalPERS participants include Santa Clara County and almost all cities in Santa Clara and San Mateo counties, although not the largest, San Jose.

Earlier this year, the CalPERS board rejected an option for systematically addressing the problem. Only the riskier alternative will be discussed Tuesday.

The only significant voice of concern has come from Gov. Jerry Brown”s administration. Eric Stern, pension expert in the state Finance Department, urged the board in August to act “sooner rather than later.”

“We really have to acknowledge,” he said, “that today”s risk levels are just too high for the state and ultimately for taxpayers who have to pay the bill for the benefits.”

To understand the issue, think about the standard advice to individuals nearing retirement. They”re told to shift to less risky investments, say from stocks to bonds.

This “derisking” principle applies to pension plans. In CalPERS” case, its membership of 1.7 million is rapidly maturing. In 2000, there were twice as many workers as retirees. By 2025, retirees will be the majority.

CalPERS should have been shifting to less-risky investments by now. It did the opposite, leaving the system more vulnerable to the next economic downturn.

Compounding the problem is the system”s current funding shortfall.

CalPERS dodged a bullet in the Great Recession because it happened to be fully funded at the start. In just two years, the funded ratio plummeted to 61 percent. Today CalPERS has only about 74 percent of the funds it should, leaving it more vulnerable to a major downturn than in 2007.

The biggest fear is that the system could slip below the 50 percent funding level, which CalPERS Chief Investment Officer Ted Eliopoulos calls a “crisis” point, “a very difficult place to climb out of if we get there.” CalPERS projects there”s a 23 to 35 percent chance of falling below that level within the next 30 years.

So why does CalPERS hold such a risky portfolio? Because riskier investments offer the possibility of greater returns. And CalPERS needs big returns to meet its aggressive investment target.

The debate now centers on how to reduce that target so CalPERS can shift assets to less-risky investments. But a lower potential return requires investing more money up front.

Many local governments resist paying more up front because their pension rates are already increasing for other reasons. And labor leaders know that increased contributions will leave less for current salaries. Thus far, those short-sighted concerns are prevailing with CalPERS board members, dominated by labor and by elected officials dependent on unions for political survival.

CalPERS currently assumes its investments will earn on average 7.5 percent annually. In February, its executives suggested lowering the target over 20 years to 6.5 percent to reduce risk. But the board opted for an alternative that would only lower the investment assumption in years of very strong earnings. CalPERS forecasts that plan would take up to 30 years to reach the 6.5 percent target.

Even 20 years is too long, says Stern, Brown”s pension expert. “We know another recession is coming. We know that for a fact; we just don”t know when it”s going to happen.”

CalPERS officials know they have a serious problem: The nation”s largest pension system holds too many risky investments to adequately withstand the next big economic downturn.

Yet the only proposal under consideration to shore up the system would take decades to properly rebalance CalPERS” portfolio. If the next major recession comes before then, the retirement system will have to sock state and local governments with devastating rate increases at a time when they can least afford it.

CalPERS participants include Santa Clara County and almost all cities in Santa Clara and San Mateo counties, although not the largest, San Jose.

Earlier this year, the CalPERS board rejected an option for systematically addressing the problem. Only the riskier alternative will be discussed Tuesday.

The only significant voice of concern has come from Gov. Jerry Brown”s administration. Eric Stern, pension expert in the state Finance Department, urged the board in August to act “sooner rather than later.”

“We really have to acknowledge,” he said, “that today”s risk levels are just too high for the state and ultimately for taxpayers who have to pay the bill for the benefits.”

To understand the issue, think about the standard advice to individuals nearing retirement. They”re told to shift to less risky investments, say from stocks to bonds.

This “derisking” principle applies to pension plans. In CalPERS” case, its membership of 1.7 million is rapidly maturing. In 2000, there were twice as many workers as retirees. By 2025, retirees will be the majority.

CalPERS should have been shifting to less-risky investments by now. It did the opposite, leaving the system more vulnerable to the next economic downturn.

Compounding the problem is the system”s current funding shortfall.

CalPERS dodged a bullet in the Great Recession because it happened to be fully funded at the start. In just two years, the funded ratio plummeted to 61 percent. Today CalPERS has only about 74 percent of the funds it should, leaving it more vulnerable to a major downturn than in 2007.

The biggest fear is that the system could slip below the 50 percent funding level, which CalPERS Chief Investment Officer Ted Eliopoulos calls a “crisis” point, “a very difficult place to climb out of if we get there.” CalPERS projects there”s a 23 to 35 percent chance of falling below that level within the next 30 years.

So why does CalPERS hold such a risky portfolio? Because riskier investments offer the possibility of greater returns. And CalPERS needs big returns to meet its aggressive investment target.

The debate now centers on how to reduce that target so CalPERS can shift assets to less-risky investments. But a lower potential return requires investing more money up front.

Many local governments resist paying more up front because their pension rates are already increasing for other reasons. And labor leaders know that increased contributions will leave less for current salaries. Thus far, those short-sighted concerns are prevailing with CalPERS board members, dominated by labor and by elected officials dependent on unions for political survival.

CalPERS currently assumes its investments will earn on average 7.5 percent annually. In February, its executives suggested lowering the target over 20 years to 6.5 percent to reduce risk. But the board opted for an alternative that would only lower the investment assumption in years of very strong earnings. CalPERS forecasts that plan would take up to 30 years to reach the 6.5 percent target.

Even 20 years is too long, says Stern, Brown”s pension expert. “We know another recession is coming. We know that for a fact; we just don”t know when it”s going to happen.”